Regulators Hound JPMorgan on London Whale Losses

“I would like to deal with some of our problems right up front,” JPMorgan (NYSE:JPM) Chairman and CEO Jamie Dimon said in a 2012 letter to shareholders. “Our biggest problem of the year — the ‘London Whale’ Chief Investment Office (CIO) issue — has been widely chronicled. Unfortunately, we also fell short on multiple control issues highlighted by the regulatory consent orders that we received. (Consent orders may be given to a bank when a regulator determines that the bank fails to meet proper standards — and they demand improved procedures.) Our consent orders came not only from the CIO issue but also around mortgage foreclosures and anti-money laundering practices.”

News that JPMorgan, the largest bank by assets in the United States, is facing massive regulatory and legal pressure is hardly new. Despite navigating the late 2000s financial crisis with with relatively few losses, it has come to light that the firm had a hand in the mortgage-backed securities market that was at the heart of the catastrophe. As revealed by its most-recent 10-Q filing with the Securities and Exchange Commission, the firm is responding to investigations relating to its offerings of MBS between 2005 and 2007.

But despite the gravity of the new and ongoing investigations regarding JPMorgan’s involvement in the MBS market — alongside accusations that the firm manipulated the energy market in California and allegations that it failed to identify and prevent money-laundering activities — arguably the biggest regulatory and legal problem still facing the bank has to deal with the London Whale incident, a botched derivatives trade that has so far lost the bank $6.2 billion.

Federal authorities are reportedly gearing up to file criminal charges against two former JPMorgan employees associated with the London Whale trade, The New York Times reports. Manager Javier Martin-Artajo and trader Julien Grout have been accused of tampering with internal records as the trade itself unfolded in order to minimize the reported losses to management. The SEC is also planning to seek an admission of wrongdoing from JPMorgan, though the agency usually allows firms to abstain from admitting or denying wrongdoing in situations like these. The SEC has not yet sought civil charges against the company, though.

The United Kingdom could potentially extradite Martin-Artajo and Grout to the United States, though this is proving to be more difficult than anticipated, as they are both natives of other European countries and have not been found yet. Recorded conversations between Bruno Iskil, the trader whose nickname was adopted to describe the incident, and Grout explored as part of a U.S. Senate Subcommittee report have allegedly shown that Iskil expressed concern over the size of the losses, and that Grout told him, “I am not marking at mids as per a previous conversation,” meaning he would move the estimated losses to more generous figures, misrepresenting the size of the damage done in London.

JPMorgan has estimated the range of possible losses associated with its ongoing and pending legal proceedings to be between $0 and $6.8 billion more than what it had already set aside. The high end of this range is up from $6 billion in the previous quarter. The firm set aside $600 million in additional litigation reserves (9 cents per share after tax) in the second quarter.